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Biotechs to Start the New Year With a Bang


Although the JP Morgan Healthcare Conference has changed over the year, it will still foster growth.

The biggest event of the biotech-investing season kicks off on Monday. The JP Morgan Healthcare Conference is the one place each year where virtually everyone from the biotech and investment community gathers in one place.

I've been attending for a number of years and one of the "sports" meeting attendees participate in is trying to guess the coming year's performance based upon the number of people crowding San Francisco's Westin St. Francis (HOT). The more attendees, the theory goes, the better performance biotech will see during the year because more attendees means more interest.

But, since JP Morgan (JPM) took over the conference a few years ago after purchasing Hambrecht & Quist, I don't believe this is a reliable metric. The conference was traditionally packed with development-stage biotech companies (those companies whose market cap is not primarily derived from a product on the market). Under JP Morgan management, the conference has seen more established businesses, insurance companies, and health care service companies.

This has shifted the action outside the St. Francis to conference rooms and suites scattered across San Francisco's downtown core. This year my firm is set up in a suite a block away and I have meetings with companies scattered elsewhere. Many of my analyst friends are hopping all over downtown to catch meetings. In 2009, I was rarely in the St. Francis but was busy with many, many meetings.

For 2010, most of the conversation inside the St. Francis will likely concern how health care and FDA regulatory reform will affect companies' business prospects. My perspective is that the current health care reform bill, absent a public option, is the biggest gift to the health care industry ever -- particularly insurance companies.

In my corner of the world, development-stage biotech, the buzz will be about partnership and deal flow. For a number of years, I called for an uptick in deal flow to spur prices in the biotech sector. I was right, but the price increases came to private companies, not publicly traded companies. That changed in 2009, which is one reason why the AMEX Biotech Index was up 45.6% in 2009 and the NASDAQ Biotech Index, which more closely tracks small, development-stage biotechs, was up 23.48%.

Investors will be examining the regulatory filing plans for a number of companies. This past year was above average for positive Phase III trials. This should generate a goodly number of FDA drug approval applications with decisions coming throughout 2010. The FDA has been more than a little unpredictable over the last five years. I, for one, am going to be closely watching its 2010 decisions to see if adult supervision has returned to the agency and provided some logic, rationale, and above all predictability to its regulatory decisions. I'm cautiously optimistic.

My guess is biotech has a good year in 2010, though it would be foolish to expect a repeat of the 24% and 45% gains we saw from the major biotech averages. My firm's Biotech Stock Research Model Portfolio was up 57.39% for 2009. While I'd be happy to see a repeat of that in 2010, I'm also expecting smaller gains concentrated in the early and late parts of the year.

I should also note that the conference is a favorite place to announce new acquisitions and partnership deals. But there are always one or two companies who release unexpectedly bad news.

Expect above-average news to flow out of the sector next week. If technical analysis is your deal, factor a higher possibility for outlier moves into your calculations if biotech companies pop up in your screens.
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